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	Vol. 230 No. 7
DAVID MICHAEL COHEN, MANAGING EDITOR

Energy policy suffers from ‘either-or’ mentality 

Speaking at the AAPG Annual Convention and Exhibition last month, Texas oilman turned clean energy crusader T. Boone Pickens related an incident that occurred while he was listening to a focus group that tested ads promoting his plan to wean the United States off imported oil. One of the participants asked, “Is this guy terminal? Is he going to die, and trying to fix it before he goes?”

On another occasion, he said, a reporter asked him if he was “kind of repenting” (presumably for the crime of membership in Big Oil) by promoting wind farms and a high-tech, expanded electrical grid after spending decades engineering oil and gas deals.

Such seems to be the state of public discourse in the US with regard to energy; you can’t be for renewable energy without being against oil and gas. It’s an assumption that, for those who hold it, renders incomprehensible the Pickens Plan’s dual focus on increased electricity from wind and increased Compressed Natural Gas (CNG) for transportation. And—although Pickens assured his AAPG audience that he is in regular contact with the Obama administration and that he and the president have similar energy goals for the US—it is an assumption that is increasingly apparent in the administration’s decisions with regard to the E&P industry.

I’m not talking about every policy that has the potential to adversely affect the industry. The carbon cap-and-trade plan working its way through Congress did not arise from any animus toward fossil fuels but from a determination that such a plan is an effective way to reduce carbon emissions, notwithstanding any arguments regarding the accuracy of that determination or the worthiness of the goal.

I’m talking about a tendency on the part of the administration to single out the oil and gas industry for exceptional, and detrimental, treatment where there is no compelling reason to do so. Such a tendency was illustrated earlier this year in the administration’s contrasting approaches to development of different forms of energy on the Outer Continental Shelf. In February, Interior Secretary Ken Salazar extended the comment period on the proposed five-year plan for OCS oil and gas development from 60 days to 240 days, meaning the plan will not be finalized until at least late September; this came months after both then-President George W. Bush and the Democratic Congress finally bowed to public pressure and ended decades-old moratoria on exploration of the shelf. Two months later, Interior finalized rules governing renewable energy generation on the OCS, opening the way for offshore wind and wave development.

Not that the US shouldn’t be developing renewable energy offshore, but if the goal is to increase domestic supplies of energy, then the shelf’s hydrocarbon resources deserve at least as much consideration as offshore wind and as-yet untested tidal energy.

More disturbing are the ways Obama’s 2010 budget proposal has singled out the domestic oil and gas industry to carry a heavier share of the tax burden, by eliminating benefits, some very long standing, meant to encourage production at home instead of abroad.

For instance, the domestic manufacturing tax deduction, passed in 2004 as part of the American Jobs Creation Act, is available to a very broad range of commercial enterprises within the US, including traditional manufacturers of tangible personal property, but also engineers, architects, software developers, building construction and renovation firms, even film producers. Of these, only oil and gas producers stand to lose this exemption in the proposed budget.

But the impact of losing this tax benefit would be nothing compared with the loss of the exemption for Intangible Drilling Costs (IDCs), which has been a part of the tax code since 1917. The Obama budget seeks to remove the exemption for IDCs, which are all the expenses associated with drilling a well other than the cost of the equipment (tangible drilling costs). These include work done to prepare a site for drilling (e.g., clearing of ground, draining and surveying), wages, fuel, repairs, supplies, drilling mud, chemicals and cement, among others. In other words, these are large and (despite their name) quite tangible expenses, most of which have deductible counterparts in other industries.

Industry analysts consistently say that removal of the IDC exemption, more than any other measure being proposed, would have a devastating effect on E&P within the US. As Pickens told World Oil after his speech, “Right now you’ve got a rig count that’s gone from 1,700 rigs down to 700. If you want to see that go down to 500, all you’ve got to do is remove the IDC [exemption].” On the positive side, Pickens said he doubts these tax measures will pass.

Part of the reason for the uncertain future of these and six other tax proposals is that they not only disproportionately target oil and gas companies over other US industries, but do so at the expense of two high-priority goals of the Obama White House: decreasing US reliance on foreign oil and stimulating job creation within the US. Furthermore, most drilling in the US is for natural gas, a fuel that will be increasingly important as the country moves toward mandatory limits on carbon emissions. Adding to the tax burden on natural gas producers will make it more difficult for electricity suppliers, vehicles and others to switch to this resource from dirtier fuels to help the administration meet its CO2 reduction goals.

It is hard to fathom why the administration would repeatedly target a single industry, even at the expense of its major policy goals, but the mindset behind such decisions may be illuminated by an incident related by Devon Energy spokesman Bill Whitsitt during a speech at this year’s Offshore Technology Conference in May:

Whitsitt was meeting with the legislative director for a member of Congress who is pushing new regulations on hydraulic fracturing of gas shales, to explain why existing practices and state regulations are sufficient to protect freshwater aquifers from contamination by fracture fluids. Toward the end of the meeting, the staffer told him, “What you’re saying may be true, but it doesn’t matter, because I’m 47, and I want to have this country off of fossil fuels by the time I’m 70.”